Financial markets welcomed the result of the first round of the French elections on Sunday. Yet voting patterns and the political reality facing the next French president leave much to ponder.
Based on nearly final results, centrist candidate Emmanuel Macron and the National Front’s Marine Le Pen will contest the second round of the French presidential election on May 7. The overwhelming likelihood is that Macron will be the next president of France—all recent opinion polls, including two conducted yesterday evening, show that he would beat Le Pen by a wide margin.
CONFIDENCE BOOST IN POLLING ACCURACY
European stocks advanced on the news, while the euro strengthened and the premium that investors demand to hold French government bonds over Bunds narrowed. There are good reasons for financial markets to take some comfort from today’s result. With 97% of the vote counted on Monday morning, Macron had taken 23.9% of the vote, Le Pen 21.4%, Francois Fillon 19.9% and Jean-Luc Mélenchon 19.6%. This split is almost identical to the share of the vote in recent opinion polls and should lead to increased confidence in the polls showing Macron beating Le Pen.
Still, anything is possible in a two-horse race. Just a few months ago, Fillon was the heavy favorite to win the presidency until a scandal wrecked his hopes. Moreover, even if Macron does win, there’s plenty to ponder in the first-round results. For example, the combined vote for extreme right- and left-wing candidates topped 40%. Indeed, Le Pen could get close to this in the second round, which would be more than double the share that her father managed (18%) in a run-off against Jacques Chirac in 2002.
RADICAL REFORM? DON’T HOLD YOUR BREATH
If Macron does win on May 7, don’t hold your breath for radical reform. Macron is untried and untested. On the campaign trail at least, he’s given no indication that he’s willing to take the tough choices needed to push France in this direction.
It’s also far from clear that Macron will be able to secure a parliamentary majority in June’s National Assembly elections, without which he will struggle to implement his program. And even if he is able to push through radical reform, it’s worth considering if this is really the right medicine for a country in which 40% of the electorate has just voted for extreme right- or left-wing candidates.
IMMEDIATE THREAT TO EURO AVOIDED
All things considered, though, the result of the first round is a positive outcome. France has avoided the worst-case scenario—a run-off between Le Pen and Mélenchon, both candidates with anti-European agendas. The probability of Macron, a pro-Europe candidate, winning the second round of voting has increased. So an imminent threat to the stability of the euro and political cohesion of the European Union appears to have been avoided.
Looking beyond France, markets will now turn their attention to the British and German general elections, due in June and September respectively. Fortunately, neither of these looks like being systemically important events. The next Italian general election is another matter entirely, as there’s a real possibility that parties either mildly or extremely hostile to the euro could gain a parliamentary majority. But that’s likely to be a story for the first half of 2018 and, in the meantime, markets should take some comfort from a diminution of European political risk.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.